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Owning a Home: Pros and Cons

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Owning a Home: Pros and Cons

If you have started to think about getting a piece of the land all for yourself, you should know the pros and cons. Even if you haven’t started thinking about this, it’s still good to know them so you can start planning ahead.

Why own a home?

Things To Know

  • Homes typically increase in value over time.
  • You build wealth with part of the money you pay on your mortgage each month.
  • You have an asset. When you buy a house, you get the house in return, and you can sell it someday and perhaps get a lot of money for it. This is not so with renting.
  • Your wealth increases each time you make a mortgage payment. Although the interest belongs to the institution that made the loan, the principal portion of the payment belongs to you, and it builds up over time. Your accumulated principal plus the appreciated value of the property is commonly referred to as your home equity, or the amount you actually own (as opposed to what you owe the bank).
  • It is often cheaper than renting. Not always, but often. It depends on many factors, such as location and the state of the housing market.
  • Homes increase in value. The demand for housing has fueled growth in real estate prices. There is no guarantee that they will keep increasing, though, but the trend is generally toward growth.
  • You can borrow against your home. By taking out a home equity loan, you can use the equity in the home as collateral to take out loans. Your home equity is the difference between what you own (the current market value of your property) and what you still owe on the property.
  • Stable neighborhoods. Neighborhoods tend to be more stable when the homes are owned rather than rented. That is because owners tend to be more invested in their homes.
  • The freedom of owning your own lodging. You can paint the walls, tear out walls, put a deck out back, install a sound studio in the basement, and much more when you own your home. And you can get pets—lots of them.
  • More room. Unless you are renting a whole house, you will probably have more space when you own a home. That can include storage space, garden space, and patio space.
  • Tax deductions. The government has provided many tax breaks to homeowners so as to keep interest in home-buying high. Some of have changed, effective in 2018. Previous to 2018, you could deduct the interest paid on any loan for which your home was the collateral. These loans could be the mortgage to purchase the house, or a loan or line of credit borrowed against the equity in it. You could also fully deduct the property taxes you paid. Beginning with the new tax law in 2018, interest on loans that borrow against home equity is only tax-deductible if it is used to buy, build, or improve your home. Using it for non-home purposes, such as a vacation or college expenses, disqualifies you from taking a tax deduction on it. Also, property taxes are no longer fully deductible; now they are capped at $10,000 as part of the total that also includes state and local taxes and sales taxes. When your family decides to sell the house and you make a profit on it, a certain part of that profit is tax free ($500,000 for married taxpayers and $250,000 for single taxpayers). That has not changed in 2018.
  • No landlord to deal with. This one is self-explanatory. Of course, if you belong to a homeowner association or condo association, you will have rules to follow.

Disadvantages of owning

  • It is often more expensive than renting. A mortgage may be more expensive. If the interest-rate on your loan is variable, it can rise over time. Also, you must come up with a down payment, which will be thousands and thousands of dollars.
  • Taxes. You will have to pay property taxes—unless you live and work on land held in trust by the federal government. These can be a few hundred dollars a month. And property taxes can and do rise.
  • You pay a lot of interest. For most people, the amount of interest that they pay on their mortgage over the course of its life will be about equal to the mortgage itself. For some, it will be much more. That means that if you take out a $100,000 mortgage, you might pay a total of $200,000 to $250,000 on it. You do get to deduct the interest on your tax form (up to the limit), but the proportion of your mortgage that goes to interest declines over time. At some point, the tax deduction may cease to be of benefit.
  • You might get assessed. Sometimes your city needs to do a project near your home. It may bill homeowners in the area for part of that cost.
  • Condo fees. If your home is a condominium, you will belong to the condo association, and you will have a monthly fee to cover various costs of the association.
  • Maintenance costs. If your furnace breaks down, the refrigerator dies, you need to replace the carpet, or whatnot, you will have to pay for all that yourself. Be sure to set aside a special fund for these expenses.
  • You are tied to it. With a rental, you can terminate the lease and move somewhere else. With a home, you are tied to it as long as you own it.
  • No amenities. You will likely not have your own gym, pool, or party room.
  • Selling. Selling can be a big headache, and you might have to sell at a time when home prices have dropped.